Tuesday, 23 November 2010

Which little pig is safe?

Here are the deficit and debt numbers for a few European nations. (Remember: deficit is the year-on-year borrowing and national debt is the total accumulated debt.)

Click to enlarge

Who do think is the next to suffer the fate of Ireland? The most important metric is probably the deficit as a percentage of GDP. Existing debt must be rolled-over but generally only once every ten years, new debt has to be funded in the markets today. This would indicate that the UK is the next to meet the wolf. However the UK is different, we have our own currency which we can print at will. So running to the IMF/EU is not something we need contemplate this side of a hyperinflationary disaster.

Next in line is Spain.

But really these numbers don't tell you much. Ireland and Greece both failed, but for different reasons. Greece was profligate to the max and doesn't really have a functioning tax base. Meanwhile in Ireland most citizens pay most of their taxes most of the time. Ireland's problem was those two large banks Allied and Anglo. They are stuffed with bad debts from the property collapse but have a taxpayer guarantee. They have been suffering a low-motion run over the last few months - so slow it has been referred to as a bank-walk rather than a bank-run. But eventually crunch time comes. There have been some suggestions in the press that the ATMs would already have run dry in Ireland if the bail-out money hadn't arrived.

So the much mooted "contagion" doesn't really apply. Different countries are suffering for different reasons. If Spain is up next it's likely to be more of an Irish situation than a Greek. Spain has over-built with holiday apartments which stand empty just like the Irish ghost towns. Twin that with, say, Santander suffering a few big bad debts in Brazil, and you might have the making of the next little pig to go running for cover.